How Much Do You Need to Save for Retirement?

I’ve had several conversations in the past month with people who are wondering how much to save for retirement. They’re worried they won’t have enough. (And the recent market turmoil only makes matters worse.)

The problem is that nobody seems to agree on what assumptions to make when planning for retirement. How much should you assume for inflation? For investment returns? For rising health-care costs? How long should you expect to live?

Conventional wisdom
Most retirement calculators base their projections on your current annual income. They use your income as a frame of reference, as a starting point for other calculations. Many financial planners will suggest that you need 80% (or 70% or 100%) of your pre-retirement income to maintain your lifestyle.

But does this really make sense?

What if your income is $50,000 a year and you’re currently spending $75,000 a year? In this case, your income understates your lifestyle. You need far more than 80% of your current income to maintain your lifestyle — and that’s before you’re retired! What if your income is $150,000 a year and you’re only spending $30,000 a year? In this case, your income overstates your lifestyle, and in a big way.

Unconventional wisdom
It seems to me — and remember, I’m not a financial expert — that it makes more sense to base your financial needs at retirement on your current spending, not your income. Your spending reflects your lifestyle; your income does not.

My advice is to figure out what you think you will spend in retirement based on your specific needs and desires. Once you have this amount, add 10 percent to it, because we always seem to have these unexpected expenses that come up.

This is another reason to value frugality. If you can live a lifestyle that is comfortable but not extravagant, you will effectively decrease the amount you need to save for retirement. Because I’ve embraced thrift, my spending has dropped. I feel like I now need to save less for retirement than I would have if I were still living the same lifestyle I had five years ago.

Running the numbers
Not every retirement calculator derives its numbers from pre-retirement income. During my research, I found several tools that let users project retirement needs based on other factors, including expenses. Some of these calculators are simple; others are more complex:

My favorite calculator, however, combines simplicity and complexity. FIRECalc 3.0 may seem overwhelming at first (there’s a lot of text to read there), but it’s actually fairly elegant. It asks for how much you have saved, how much you’ll spend every year, and how many years you expect to live. Then, using historical data, it produces a graph to show you how likely your planning is to succeed:

FIRECalc shows you the results of every starting point, since 1871. You can get a sense of just how safe or risky your retirement plan is, based on how it would have withstood every market condition we have ever faced.

If you want to make the FIRECalc model more complex, you can. But it’s possible to have fun with it — and to learn a lot — by just using the basic data fields on the main page.

“How much should I save for retirement?” is a complex question. There’s no magic answer because nobody can see the future. All you can do is make your best guess while taking into account historical rates of inflation and investment returns, future health-care costs, and your estimated life expectancy.

Have you attempted to calculate your retirement number? What method did you use and why? If you’re close to (or actually in) retirement, I’d love to hear your advice. How should those of us in the planning stages proceed?

Addendum: A PR person for Scottrade just contacted me to promote their retirement calculator. I actually think this one’s pretty good, too.

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I’ve read this kind of information, but it is very complete and comprehensive, so that I can better understand it. To be honest I never have a dilemma that is difficult to discover the solution.Thank you for this information.

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Forex Broker

A lot of planing that is. Retirement should be a time we think we can just sit back and relax but due to the consistent financial crisis, it just seemed to be a time of frugality. We may calculate our futures need at this point but I think that still does not guaranty because of the uncertainties around.

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Doug

Just a comment for ResortAtSquawCreekTAHOE. It looks like if you are using just your base to live on and not your bonus you could not survive. You have 140K base take out taxes at a conservative 30% and you take home 98K/ year subtract out your 6.1K month home mortgage and you have 24.8K left for the year, or 2,066 per month for everything else. It’s livable, but I spend more than that a month. I’m not on the I don’t believe you band wagon, but sounds like you overbought on the house most people like to stay in the 30% of pay range on a house payment. Just a thought.

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Kathir

I am 39. I bought my first apartment ten years back and in the next 4 years cleared the mortgage loan with a vigor with all my variable income. I had taken loan based on my fixed income. I went for the second flat in 2007 and will come out of the loans before 2010. I am an entrepreneur and my business bought a office space. So I need to think about a retirement corpus starting 2011 after being completely debt free.

Whenever I am in a debt free state, my savings accumulate rapidly, paving way for next big investment.

Long way to go and I may work till 70.

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ResortAtSquawCreekTAHOE

Jesse – I caught that mistake instantly. The difference is just gravy for me b/c what I care about is cash money, and to a lesser extent stocks. You can snicker all you want about people in finance. I’m 31, and I’ve managed to save up $335,000 in cash earning 4% interest between two banks. My company stock has now rebounded to $205,000 with this market comeback, and my 401K is also back up to about $165,000.

If the market can stabilize at this level for the rest of the year, my $250,000 bonus assumption could be literally $100,000 too low. However, I’m going to remain conservative and say I only make $390,000 all in /year for the next 4-5 years.

How about you Jessie? How old are you, and how much have you saved? My goal is to not have to work at 41 if I don’t want to, and definitely finish up before 45, the age which i will have $3million in cash, and $2million in equity with my rental property paid off and providing me $3,500/month in income.

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Jesse

The guy in the finance industry double counted the subtotal in his balance sheet. Does anybody else worry about the accuracy of Q1 bank earnings?

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ResortAtSquawCreekTAHOE

sorry, from my post #95, my networth calculation is wrong, should be $4 mil, not 6mil. I double counted a subtotal in my spreadsheet. oops. Everything else makes sense. Frankly, I can’t count on anything (value of stocks, property etc). The only think i’m aiming for is cash, and the perpetual interest income i can receive off that cash, which is 120k at a 4% interest rate off of 3mil.

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ResortAtSquawCreekTAHOE

I forgot to mention what my retirement $ amount was. It WAS $3 million cash by age 40, but now i’ll have to work til 43 or 44 to save up $3mil b/c at age 40-41, I’ll be 800K short as mentioned.

Why $3mil? I figure I could get 4% taxable interest risk free in some 5 year CD at that level by then (you can get it now at First Republic Bank in this environment where rates are at record lows). So, that would be $120,000/yr in income which is not too far off my current $140,000 based, and my AVERAGE $120,000 base over the past 5 years (before promotions). Furthermore, I hope by age 43-44 now, I’ll have my rental property paid off in full, so a net $300/month return now becomes a net $3,000/month or more return w/ rental inflation.

I could live in my house, which currently has a 6.1K/month mortgaqe, on it, or by that time, I could perhaps sell the house and extract 1 mil (purely based on paying down the mortgage, and only assuming a 5% increase in the value 11-12 years from now after already assuming a 15% decline from the peak). Who the heck knows the value, but this is a prime property in a city that didn’t go bonkers in the first place.

So that’s that. $3mil cash is my goal, which I hoped to have achieved by age 40, but now have to work another 3-4 years to get that. I DON’T want to work til 50 just to get another $1million or more. I’d rather do something else with my life, live service my country via the Foreign Service.

Best

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ResortAtSquawCreekTAHOE

Hi believe Ann,

B/c it sounds like she owns a home, and lives in a more expensive city.

I’m 31, and my net worth is a little over $2 million after the crash of 2008.

Stats: $375K average income over the past 4 years, and I’ve worked for 9.5 years right out of school. I’ve saved/invested my bonus every year. Some good, some bad like my vacation property in Tahoe. I have 3 properties: My house in SF (bought 5 years ago), my rental property in Pac heights (bought 7 years ago and is net income generating), and my Tahoe property bought 2 years ago for 13% less than what they paid for it, but now it’s down another 30%++!!

Total property assets AFTER a downturn is $3million. Total mortgage debt is $2million. Total cash in the bank is $340,000, 401K $165,000 (was $230,000!), and total company stock is $185,000 (was $275,000!).

I drive a 9 year old car that I bought 2 years ago for $8,000. I’ve got about $20,000 worth of high end collectors watches. Also have 30K in graduate school debt at 2.6%, so I’m hesitant to pay it off since my 340K in savings makes 3.5% on average right now. I got my MBA part-time with my employer paying 70% of it, so i didn’t miss a beat in my promotion process. They actually promoted me quicker b/c they were amazed i could juggle two things at once. Took 3 years, and i used some of the refund money to invest instead of pay off the tuition btw.

I got caught up in the property market, but chose to buy my place at The Resort at Squaw Creek (www.squawcreek.com) b/c it was a lifestyle choice. I love to ski, golf, hike, and mountain bike. This is a 4 Diamond Resort and I told myself that this was all i needed to complete my real estate portfolio. It has $35,000/yr in rental income (based off 50% occupancy), which isn’t enough to cover the mortgage. This is my biggest drain and mistake, my vacation property. But, I look back on it, and say i’ve learned something, and that at least i no longer need to look for a vacation property haha.

When I was 30, I made $740,000 after a $600,000 bonus, and I thought I was on top of the world. 2008 happened, and my bonus was cut to $290,000, but at least i got a bonus and I’m NOT complaining. In my retirement spreadhseet, i was going to put in a “conservative” $500,000 yearly bonus from now until i want to quit the finance industry in 8 years (40 years old). Now i lowered the number to 250K (another18% below what i got recently).

In 8 years, at age 40, I will have a $6 million networth, $2.2 million of which is cash and liquid stock (based off no appreciation).

So that’s me. A 31, soon to be 32 year old finance guy, who’s worked almost 10 years out of school, got his MBA part-time over 3 years, lives off his $140,000 base, and saves/invests all his bonus. I’ve had some wins, and some big time multiple $100K losses, and I’m still here. I was a little depressed for a while about overextending myself, but figure, shoot, just work until 43 in finance to build your goal.

The best advice really is to pay yourself first, make things automatic, and get as much education as possible (formal, reading) etc. “Betting BIG” has also helped, but has also hurt, so watchout.

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Kevin

Ann (regarding your edited comment): I think I see part of the discrepancy. $250k may be what a programmer + an engineer make in your neck of the woods, but where I am, it’s “only” about $75k each. We have a pre-tax household income of around $150,000. Saving 24% of our GROSS income (34% of net) is well above average – yet we’re still far behind you. Are you starting to understand why we’re hungry for more details regarding your story?

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Kevin

Ann, I’ve given you every opportunity to explain, but you keep refusing to do so. I really can’t help you any more. OF COURSE people are going to doubt you if all you offer is a fantastic result and refuse to provide details, even when pressed repeatedly. Can you really blame people? Try and see it from our point of view.

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Ann

@Kevin (#91) –

Oh, dear. DINKs (dual income, no kids) and you guys only save $3k per month!?! And one of you is a ‘geer! You guys are either grossly underpaid or your spending is out of control.

At this point, I’m not going to provide more details because no matter what I say, y’all will assume I’m lying. So, what’s the point? The mind-set here seems to be: If you can’t do it, no one can.

ETA: Do you have any idea what I can do with a combined annual income of at least $250k? Oh, man. (Of course, $250k/a is what a programmer and an engineer in my age group would make in my area.)

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Kevin

@Ann (#90):

University degree? Check. I’ve got a Bachelor of Computer Science with Honours degree. My wife’s degree is as an Industrial Engineer. 2 university degrees, no children, and very aggressive saving (around $3,000/month), and our net worth is “only” around half of yours. We’re 33.

People keep asking you for details, but you still haven’t provided them. You’ve got a university degree – great, what field is it in? When did you graduate university? Are you married? Do you have children? Did you inherit any money? What did your budget look like when you started out, and how has it changed over the years? People have asked you several times for specifics. We’re not trying to be confrontational – we’re sincerely interested! Tell us! 🙂

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Ann

@ Kevin (#89) –

It’s called having a university degree. Seriously, where are you guys from that it’s supposedly impossible to be at 500k by 29 (birthday’s in November)? Detroit?

Ann, if it makes you feel better, Chris isn’t your only doubter. I also don’t believe you’re being completely honest. It’s simply not possible for an lone individual to amass a net worth of $500,000 by age 30 without some serious outside help. You yourself admitted that your parents were millionaires, even if they’re not anymore. I just find it hard to believe that they weren’t somehow involved in your miraculous accumulation of wealth.

What’s the catch? What are you leaving out? Is that $400k in real estate mortgaged? Maybe from your millionaire parents, at 0%? You’re leaving something out, and it’s hurting your credibility. Sorry, I don’t mean to hurt your feelings, I’m just too good at math to take your story at face value.

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Ann

@ Chris (#87) –

Good thing your belief is not required to validate myself or my net worth.

If it makes you feel better, I’ll lie and tell you I won the lottery or snagged a sugar daddy.

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Chris

@ Ann #81

Fair enough.. I still don’t believe you, though. 🙂

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Kevin

@John (#85)

I think you’re making the common mistake of assuming that a TFSA is just like any other “Savings” account, that pays a paltry 2-3% interest, tops. In fact, a TFSA is just like an RRSP. It can hold cash, bonds, stocks, mutual funds, whatever. All the same kind of things an RRSP can hold. I’m holding S&P 500 index funds in mine, which over the long term, should average roughly 8%.

Hope this helps.

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John

Kevin:

Just show me a TFSA with an 8% interest rate.

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Kevin

@Aperson (#82)

There is no such thing as a CPP “clawback.” You’re thinking of Old Age Security (OAS), which is clawed back starting at around $65,000.

CPP is not means-tested. Your payments are based solely on your contributions and the age at which you start to collect it (60, at the earliest, with a 30% penalty, 65 for full CPP, or if you delay it till age 70, you get a 30% bonus). You’ve paid into the system, you’re entitled to your benefits, regardless of how much you have in other investments.

On the other hand, OAS is clawed back, starting at about $65,000. Also, you can’t even start to claim OAS until age 65. Keep in mind that that income “clawback” level will adjust with inflation, so it will be higher by the time you’re actually ready to retire.

Fortunately, Harper’s Conservative government gave us a handy tool to dodge the OAS clawback limit – the Tax Free Savings Account (TFSA). If you’re married, and you and your spouse both max out your TFSAs for the next 20 years or so, and earn about an 8% rate of return, you should have about $750,000 in them by the time you retire. The trick is to withdraw just enough from your RRSP to make your combined CPP + RRSP income equal to the OAS clawback. That way you’ll still get the maximum OAS benefit. If you want more income, then you can “top yourself up” from your TFSA, and it won’t count towards your taxable income, thus it won’t affect your OAS clawback. With $750,000 in your TFSAs, you could add another $50,000 in income to your coffers every year for the next 15 years, tax-free, without raising your income into OAS-clawback-range.

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elisabeth

It was a year or so before the last (not this current) downturn that my husband and I went to a “retirement seminar” course (I think it was 4-6 weeks) that my husband’s company sponsored. At the end, the seminar leader gave each person the opportunity for a private appointment. No real surprise for us — he said we had “too much” (477% too much in fact) in savings and “not enough” in investments (which of course his company would be happy to handle for us). Well, we didn’t take his advice, and so while we “lost” money in the succeeding upturn (including not moving up to a larger house), we also didn’t lose as much when the corrections came. I am quite cynical about all advice/analysis from financial firms about retirement funds/funding –it’t in their best interest to make people feel that they need more more more and can only get it with the help of a broker!
When I retired in July 2008, I gave myself a budget of how much I could spend each month and have enough to not touch my “real” retirememnt money until I’m at least 62 (the earliest I could tap social security). So far, I have spent at least $500.00 less than the budget each month and yet I’m still buying clothes, books, fresh flowers, and art/hobby materials and contributing to household expenses in the same way I did before I retired. Lifestyle really is the key (I’m sure it helps that I didn’t retire “to travel”) but so is having a great partner, who has also been saving/frugal forever, and we have been lucky: we have not had to help support any aging parents and since we are childless, don’t have those expenses/expectations, either. Of course, friends who are also childless do wonder/worry with me what will happen if we become incapacitated….

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Aperson

@Gene #52-

I was wondering if you know how the “clawback” will be affecting our CPP payments if we are going to be in a high tax bracket? Does it make sense to stop saving at some point in order not to be “clawed”?

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Ann

@Chris (#77) –

Yes, all on my own. I learned the value of hard work because I was born in a third-world country, immigrated to Canada at an early age, and decided I didn’t like being poor. I watched my parents go from being nearly penniless to amassing over a $1 MM in net worth in 20 years. (Of course, they made numerous bad investments and their retirement will be rocky. However, since I don’t want to see my parents on the streets, I’ll be helping them out.)

As of right now, my networth increases by $55k-60k per annum. Just because you can’t do it doesn’t mean someone else can’t either.

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Canadian Dream

I agree it has to do more with your spending than income. After all if your house is paid off you don’t need a lot of money for that. Also if you are retiring on a modest income you also have a much lower tax bill.

The whole question can be hard to figure out. I don’t trust most calculators because they make it too simple. Also making it more complex doesn’t make it right either.

In the end, all you can do is take an educated guess on what you need. You won’t know for sure until after you retire.

Tim

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Aperson

@ Chris #77

Well she did say she writes fiction as a hobby…Ha ha!

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None

Health care costs are the wild card.

I agree with those above who feel like health care is unlikely to be fully covered for us (those under 40-50, say)… and I worry that it can be astronomically expensive to pay for health care on your own when you’re older. Even given medicare, co-pays and drug costs and such are a cost equivalent to housing for my grandparents. And it’s only likely to go up.

I feel like the most realistic estimate I can do now is to estimate my expenses aside from health care… and then triple it. But I’d love to see a full post devoted to how to handle this issue…!

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Chris

@ Ann #71

Congrats if what you are saying is true. Amassing approx 40K of wealth every year since you were 13 is truly amazing.. All on your own? Tough to swallow, I’m afraid.

Sorry, I’m a cynic.

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Andrea

My husband retired this year and I am retiring next year- he is 67 and I will be 56 this year. Gross numbers don’t work- I fully funded my Federal TSP plus a Roth IRA for myself each year(well, not always but in more recent years) and partial ones for my kids. So in a sense, that money was already out of my salary-so what % of my salary do I need- based on the standard numbers? No mortgage anymore, no car payments, no other debt. I have a good pension- and don’t plan to use any retirement funds for some time(with what the market has done to them). The “standard” just doesn’t mean anything – how you live, how you save, how you can accommodate life changes while still relatively healthy and mobile, and what you will do in retirement(whatever that means) requires you to figure it out

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DDFD at DivorcedDadFrugalDad

In my opinion, the target savings/investment rate should be at least 10% of annual income, but my goal is 20% . . .

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Anne

I personally don’t think people need as much as those retirement calculators say, at least I hope not! Because unless my husband and I get some really nice inheritances, it is not very likely we will sock away anywhere near the money the retirement experts say we should. And since I figure his mom and my mom (my dad passed away in August) will probably be around for another 20 years – I am not counting on them having a lot of their nest egg left.

Then again, I am one of those people who see no problem with moving in with my kids if necessary. As a matter of fact, I think it is sad how our society has gotten this attitude that the worst thing in the world that could happen is for you to move in with your kids, or to have your parents move in with you. For thousands of years that was the NORM.

I have sacrificed so that my kids could have a better education than I do (my daughter has a Master’s degree; my oldest son a Bachelor’s; and my two younger kids know that not getting a college degree is not even an option). I have also sacrificed so that my kids could pursue their interests in a way that my husband and I never did (because it wasn’t a part of the blue-collar lifestyle we grew up in) – as a result, my son is working towards being a professional golfer. If he makes it, I am set! But even if he doesn’t, I completely expect that if I and/or my husband should need it, our children will welcome us into their homes. And if you asked them, I am sure they would agree, because that is the way we have raised them.

(I should maybe add that my two oldest, ages 24 and 21, still live at home because it is just cheaper that way, and I love having them here. Again, so many people can’t wait for their kids to move out. I can’t understand their hurry. My children are wonderful people; we love spending time together; and they will be out on their own, having their own families soon enough! This is just the way we have raised our kids, we our our OWN safety net.)

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Tyler Karaszewski

Also @Chris (#28):
I know a guy who sold a start-up company at age 30 for about $18 million. I don’t own a company I could sell, so comparing myself to him financially doesn’t do me any good. It’s not a fair comparison to yourself unless you know the other person’s background, and it’s similar to yours.

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Charles Who

I don’t see too many people talking about medication and medical costs. Which can be brutal. Medical care can be sub par with no extra insurance. Sad but true. And what happens if your partner develops some disease that does not kill but destroys quality of life? How much do you save for with that picture in mind?

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Ann

@Chris (#28)-

I guess I should add I have a full-time job that pays a decent salary; a part-time, income-generating hobby writing fiction; and a small business, which I use to buy and rent out residential real estate.

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Trevor @ Financialnut

You’re right- it’s hard to base what you need for retirement off of your net income. Doesn’t make sense- what if I save a ton of money right now? What if I spend too much money right now? Look at the spending.

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Ann

@Ben (#67)-
“Mom, Dad, you two can live with me.”

They sheltered, clothed, and fed you. It’s the least you can do in return.

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Ann

@Chris (#28)-
I don’t know what’s there to explain, really.

I’m very aggressive when it comes to debt and always have been. I have $400k of equity in my primary residence and will be repaying the remainder of the mortgage this year. I have a rental property, but I don’t include it in any calculations because the mortgage on it still makes me gasp a little. However, I should have that mortgage licked by 2015, if not earlier.

I have $100k in my RRSP and non-RRSP accounts through diligent saving.

I started my first business at 13 and have been saving ever since. While other kids dreamed of being doctors and engineers, I dreamed of early retirement.

Of course, I lost a whole whack of money in the stock market at 19, so I have been conservative with my investments ever since. Financial advisers berate me for it, but I sleep easier at night with my conservative strategy: I work hard so my money doesn’t have to.

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Ben

Great site and article. I’ve been a long time reader, first time commenter. I feel well prepared in my financial wisdom and future savings. However, my parents are well behind the curve. I imagine i’m not the only one. Their conventional thinking and poor financial wisdom has left them very ill prepared for their upcoming retirements. Any chance on an article how we Generation X folks can help our Baby Boomer parents?
Keep up the good work!

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Steve @ Freedom Education

Hi JD,

I guess I’ve changed my perspective quite a bit when it comes to saving.

Don’t get me wrong, I do have an investment plan and manage my money responsibly, but even with these pieces in place I can’t see that this strategy alone will provide enough income to maintain my ideal lifestyle during retirement.

So, I’ve taken it a step further to build and grow my business. Nowadays, having a job is not enough.

Maybe it’s just me, but who wants to settle for just the status quo?

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Jay

@ Elizabeth # 25

As you point out science is pushing the boundries of the human health system we will probably see a slight increase in the average lifespan. These technologies also grant us a more fullfilling golden years, allowing for more involvement in physical and social activities. What is lacking in your argument and impossible for science to correct is the will to live. Thousands of people every year do not so much die, as just fade away. One can find fault in this slow and steady self infliceted demis, but on the other hand can we not understand a person who has just tired of living? If an elderly person has lost their partner of 50 some years, their children live in a far off location, and the highlight of the day is reruns then I do not think I would have much will to live either.

Old age is not some new phenomenon of the current century. We have had centurians for thousands of years. What has changed is the mortality rate under the age of 5, this has raised our numbers for life expectancy. Yes we are as a whole living longer (in the US), but we will still have a ceiling in which the general public can expect to live. Now this is taking into account smoking, drinking, obesity, and general accidents. Science can only do so much for a person run over by a bus.

I do though take your position that we need to be weary of the number of years we need to save for in retirement. This is especially true for those (and there are many who read this site) who’s goal is to retire early. This may be a grand and noble goal but there are huge downsides to leaving the workforce before you qualify for SS and Medicare. The federal government set full retirement at 69 and 1/2 for people born the same year as me. This is a probably a starting point to work from and one that I will be using to base my retirement asumptions on.

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Sarah

We know we’ll have our house paid off 10 years before we retire so we make sure to calculate a little lower. Without the expense of paying a mortgage and having $200,000+ in a house, we’ll have much lower income needs!!!

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Debbie M

For those of you having trouble with the calculators, could you get tricky with the numbers? Like if you’re 20 and want to retire at 65, could you claim you’re 35 and want to retire at 80? And claim that you plan to live 35 years after that?

I am six years from retiring (maybe). Here’s my plan.

To calculate how much I need, I started with my current after tax income. Then I made adjustments on things I plan to change. For example, I will quit saving for retirement and I will have my house paid off, so I can subtract the P&I part of my mortgage payment. I will also want to increase my savings for health costs and my savings for fun (because I will have more time to have fun during). Some people can also make adjustments based on not having to buy fancy clothes for work or commute to work or having more time to cook at home.

Then, I calculate everything in today’s dollars. So I pretend I’ll never get a raise, but then I pretend there’s no inflation, either. That makes the math easier. When I do want to forecast things, I try to be conservative: I estimate 4% inflation, 3% raises, and 8% stock returns.

In my case, I have an awesome pension that will be about 60% of my pay and thus will cover just about everything (assuming that I quit saving for retirement and have my house paid off). It also includes health insurance.

However, because rules can change at any time and you shouldn’t have all your eggs in one basket, etc., I’m also contributing to a other retirement accounts.

I’m trying to diversify as much as I can. Ideally I’d like to know that if any one of my baskets completely disappeared, I’d be fine. My current “baskets” are: company pension, paying off the house, IRA, Social Security, and 403(b) plan. But if my pension tanks, I’m in trouble. If anything else tanks, I’m still golden.

If I didn’t have a pension, I’d want to have 15 times the total amount I need. If my house is paid off, I’d need about $1650/month after taxes, and since all my retirement stuff is in Roth (after-tax) accounts, that’s about a third of a million. Then I could withdraw 7% per year. People say that it’s safe to withdraw 4% per year, but that’s if you calculate the 4% the first year and then increase that each year because of inflation. I would recalculate the 7% every year. If I got more than I needed (during stock bubbles), I’d buy bonds or treasury bills with the excess. If I got less than I needed (like I would have this year), I’d get even more frugal and/or sell bonds or treasury bills.

I assume my money needs to last forever. That’s sort of like assuming I’ll live forever, but since I’m planning to retire at 52 and I might very well live to be 100, that may as well be forever.

I also assume I won’t need a nursing home, at least not for long. That is not a safe assumption, but on my income, I could never afford long-term care insurance. Actually, I could, if it were an extremely high priority, but it just costs too much, so I’m not going to.

And how am I doing so far? My house will be paid off in five years. And I started contributing to a Roth IRA as soon as there were Roth IRAs 9 years ago and was able to contribute the maximum ($2000, back then). I have been able to continue contributing the maximum as that increased, and last year also started contributing to a 403b plan (just an additional $100/month).

The bad news is that half my net worth is in my (small) house, half the remainder is in my pension, and I have only $43,000 in my other retirement accounts. Add $37,000 in contributions plus interest and additions over the next six years and that’s still nothing. So I don’t have a good back-up plan at all if my pension is ruined except to keep working. At least that is quite likely to still be possible at the age of 52.

Note: I make the same as a first-year teacher, so that’s way more than minimum wage, but way less than all my programmer friends make.

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partgypsy

Elizabeth I haven’t read those particular researchers but the available literature suggest that there are limits to lifespan in humans, and we are probably pretty close to it. To give an example the calorie restriction diet while almost doubling lifespan for other animals does not seem to be as great of benefit to humans (perhaps because it is only started during adulthood). For whatever evolutionary quirks we have combined with modern medicine we already have an outsized lifespan for a mammal our size. The “in” thing is squaring the curve, that is increasing the amount of healthy non-debilitated life for our life span.

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JimW

I’m in aviation. We tend to take our safety factors and risks serious in this industry, and an engineer by the name of Bud Heebler retired from Boeing and started addressing the rules of thumbs and assumptions in the press. He’s got another spreadsheet (free) and a I felt it did real scrutizing to come up with my number. I like his articles too.

The big question that I haven’t seen discussed here is the cost of insurance. With very few employers paying for insurance during retirement and the need for health care, prescription drugs increasing as you age, that is the biggest unknown factor I can see in determining how much is needed for retirement.

A lot of people are paying $400 and up for health insurance during retirement today. Many teachers I work with have a great pension, but substitute once or twice a week to offest the cost of purchasing insurance. What will that look like 30 years from now? I don’t want this to digress to government health care or the problems of health care, but it is a very real factor to consider when thinking about retirement.

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Isaiah

Great post but I would like to hear more from people who had a savings plan/retirement goal for 20-40 years and are now retired and living that plan. I always hear you should do this or that but never someone say… it worked for me!

Cause life happens and where I think I would be when I was 25 can be totally different by 65. I don’t want to be filthy rich but I would love to pay for my own health care and etc…

I am partially in agreement with Tyler (#49). I just turned 34 and like him, so much has changed for me in the past 5 years financially, I can only imagine how much I’ll be able to save over the next 25-30 years. I’d like to retire early, so we’ve really cut the fat out of our spending and will likely buy less house this summer than we planned on even a year ago at this time.

The scary thing I foresee is healthcare costs. Who knows what system we’ll have by then? Also putting our son through college along with any other kids we have.

Note: by retiring early I mean to not work 45 hours a week – I can’t see myself completely without a job or some money making venture.

I truly think the best way to plan for retirement is controlling your spending during your pre-retirement life so it’s not a huge shock when you get there. Like someone earlier said, the less you spend now, the less you’ll need to save to spend in retirement. Now that’s compounding.

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Paul in cAshburn

@E #51:
Mathias Stearn says: “What good is that $2M in the bank when your (and your spouse’s) time is up? There is no prize for dying rich.”

E says: “The good is, you’re prepared for a sharp increase in medical expenses or anything else that may come up – including unforeseen opportunities for travel or living situation. So you ARE helping yourself by living below your means. Also, there’s nothing wrong with dying rich – I hope to be able to leave something behind for causes I care about.”

I agree with E. The prize is you’re becoming self-sufficient for life – regardless of how long you live, and, in the end you’re able to leave your capital to family or charity. Capitalism is great!

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Kevin

If you’re making $50k and speding $75k annually…you’re not gonna retire!

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Erin in Portland

I’m 24 and I’ve had a difficult time finding a good retirement calculator for young people. A lot of them I’ve seen are for a minimum age of 35.

Also, basing things off my current salary seem misleading, because I expect to make more money in the future as my career blossoms.

Does anyone know any good ones for us young folks just starting out?

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chacha1

Based on family history, I expect to live to 90+. I expect to not “retire,” i.e. stop working full-time, until age 70+. I expect that SS will still be available at that point (it *will* be reformed in the next few years), but that Medicare may not.
I expect, therefore, to be 100% responsible for my own healthcare costs. I look at the aging women in my own family to project those.
I expect to own a residence by the time I stop working full-time. Therefore, my current housing costs are not relevant. I project 1000/mo will cover home insurance, taxes, and utilities in the area where I want to live after “retirement.” I further project that an additional 1000/mo will cover food, pet care, and healthcare. (I consider pets a necessity, not a luxury! They are proven to have health benefits!) That means I need retirement income of 2000/mo, plus 25% to cover income taxes, so $2500/mo. That’s 30,000/yr.
My time line is 30 years. Certain planners say you can multiply your projected required retirement income by 15 to arrive at the amount you need to have in retirement savings (investments) in order to provide that income. So 15 x 30,000 = 450,000. I already have 100K, or will as soon as the market picks back up. That means over 30 years I need to save 350K. 350K divided by 30 = 11,666/yr to save, = 972/mo to save. This looks like an awful lot until you realize that until last year, my DH and I were paying over 2000/mo to credit card companies. It is do-able. And the above calculations leave out SS entirely, which as I mentioned I do expect to still be available by 2050 – so if it is, my retirement standard of living will be significantly higher.
Retirement expenses will be higher, of course, if I’m not living alone, but really only in the areas of food & healthcare. I hope to retire to an area where we can have a proper garden & some chickens. I’m looking forward to more from J.D. on his home farm!

As an insurance side note, there are ways to insure all or part of your income. But using insurance as a retirement tool might not be the right path for everyone. I would recommend most people do this kind of calculation with a fee-only financial planner before looking at specific solutions.

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Gene

Beth,

Yes, alternative medicine is not covered. I didn’t mention them as I personally don’t believe in them, thus they don’t cross my mind. However , dentistry and some other costs (eye glasses) aren’t covered either, so my comment was not fully correct. But up here it is a sight better than in the US but not as good as places in Europe, esp. France.

How our governments finally fix healthcare will determine what level of care we’ll get long term. I’m hoping they can manage to do that and not destroy something we all cherish.

Holly,

We have the advantage that more than a decade ago our government opted to fully fund the CPP as well as address the massive debt. Today, with a fully funded CPP it means we don’t have to worry about it going away, which is a good thing. And, overall, our economy is in much better shape than during any other recession because of the reasonable amount of fiscal prudence and our having the lowest Debt-to-GDP ration in the G8. It could have been better, but it also could have been much much worse.

As to downsizing, that is something you want to do on your own terms and timetable. If forced into it, at any age, you end up at the short end of the stick. I’ve seen this all too often, esp. after divorce.

As to pensions, my employer eliminated them years ago, grandfathering individuals who were with the firm prior to a given date. I don’t see government employee pensions going away nor do I see CPP or OAS going away, though I could see the age of retirement set by the government being set by age and not by years of service.

I don’t have a pension as I’ve been self employed most of my life, until recently. Thus, I’ve had to save and then restart saving after a serious dot com implosion of my firm in the early 2000s resulted in major losses. Thus, the book Smoke and Mirrors allowed me to take a good step back and calculate how much my wife and I would truly need. It was substantially less, or so it seemed. And when I ran the numbers, it was substantially less than I was ever led to believe. In fact, I could live better than I do now, with annual vacations, on about $45k/year once retired. The cost of running the home and familial obligations (RESP, RRSP, clothing, etc.) all require substantial outlays that will disappear once my wife and I retire.

And thanks for the comments Beth and Holly. In a short post it’s hard to put forward detail, and I apologize if my glossing over certain costs. Of course, this comment may simply be too long now. Oh well.

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E

Mathias Stearn says: “What good is that $2M in the bank when your (and your spouse’s) time is up? There is no prize for dieing rich. Obviously you should live within your means, but you are not helping yourself by living significantly under them!”

The good is, you’re prepared for a sharp increase in medical expenses or anything else that may come up – including unforeseen opportunities for travel or living situation. So you ARE helping yourself by living below your means. Also, there’s nothing wrong with dying rich – I hope to be able to leave something behind for causes I care about. And I expect to live a loooong time.

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Casey

I have an overdue thank you for you. I’ve been reading your blog for about two years now. You were the impetus for me to take charge of my finances. My husband and I have now paid off $12,000 of debt that we accumulated over eight years. We have over $5000 in our savings account. Once we reach six months worth of expenses in savings, we will switch to saving for retirement and college for our kids (I already have a great retirement plan through work). I’m in the best financial shape of my life now. It was arduous and not fun at the beginning, but now it is incredibly fun for both my husband and me. We are splurging on a Disneyland vacation with the kids this fall, but only because we can pay cash and still meet our financial goals.

If you ever find yourself wondering if you’ve made an impact, you have. Thank you.

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Tyler Karaszewski

I understand why people try to do this calculation, because it would be a really useful number to know, but there is *so* much guesswork involved, that I’ve just given up.

I am 27 years old. The soonest I could retire and use my 401K is 32 years from now. My entire lifespan so far is still shorter than the time I have left until retirement, even if I retire early at 59.5.

Given the number of changes that have happened in my life over even the past five years, trying to predict my salary or expenses over 30 years from now seems completely pointless. Predicting average market returns seems only slightly less pointless.

For now, I’m just going to make healthy 401k contributions, realizing that anything saved is better than nothing, and recognizing that too much saving is safer than the opposite, and I’ll revisit actual numbers when I’m 50.

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Stephen

If you ignore the status quo and cut expenses way back, you can retire extremely early:

Last I heard (couple months ago), the average car payment in America according to the National Auto Dealers Association was $484 per month over 84 months. Lets round that up to $500 just for sake of using the chart.

Invested in a good growth stock mutual fund, over 40 years (working life time) that car payment could instead be $5.8 million dollars.

Hope you like the car.

Free up your income by getting out of debt. Stop playing the games that Middle Class America plays thinking they’re being prosperous. Driving a car with a $500/mo car payment is not the path to prosperity.

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Marie

I have to admit I envy commenters planning into their 90s and 100s. Nice problem to have! My husband’s family is lucky to hit 60. Unfortunately, we are planning for a long widowhood for me.

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al

i agree with other young commenters (i’m 23) that it’s hard to know what we’ll need lifestyle-wise 40-50 years from now. i don’t think i want to live like a 23-year-old after i retire 🙂 so at the moment i’m saving as much as i can and will try to work out the numbers a little later. i have no mortgage, i’m not paying for life insurance, my medical expenses are really low, and i have no kids…but all of that will change!

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Mathias Stearn

I’m going to have to disagree. I think income is a good measure because it is the pool from which you are allocating your funds. If you are currently spending only 50% of your (after-tax) income you are putting the other 50% away for retirement. In that case you will have significantly better lifestyle after you retire than before. On the other hand, if you were to base your retirement needs on your current (low) spending you will need to save less now and can therefore spend more creating an odd feedback loop. I think the percent of income calculations are (or at least should be) designed to maximize both pre and post retirement.

One problem I see with most investing advise is that money is seen as the goal rather than a means to an end. The concept of saving up $2M so that you can only take out 4% per year and have it last forever is horrible advise in my view. What good is that $2M in the bank when your (and your spouse’s) time is up? There is no prize for dieing rich. Obviously you should live within your means, but you are not helping yourself by living significantly under them!

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Chris Johnson

@ #25, 35, 36 Elizabeth and Brian:

That’s excellent thinking–I’m an estate planning/probate attorney, and see plenty of people living into their 90s and low 100s now, which can only be more common in the next few decades. Planning to live to 100 if you’re in your 30s to 50s now makes sense, especially because costs of outside care when you’re older, like assisted living or home health care, can get pricey.

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Holly

@ Gene:
I believe you have made very valid points…and I used to think the exact same way. But, the game has changed. I saw my own parents struggle when they had hopes of ‘downsizing’, only to find that the home prices had skyrocketed. And of course, here in the U.S., we are simply not able to depend on a SS check since the gov’t can’t sustain it for too much longer. My husband is vested in a gov’t pension, but now we’ve been seeing pensions disappear- how any company or gov’t can justify taking away something that has been counted on by so many people for retirement is beyond me. So, I think with these uncertainties (as well as whether or not we’ll still be solvent in our later years what w/today’s atronomical costs of healthcare and elder-care), we’d be better off to be prepared than not.

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Ruth

$400,000 is my target. I plan to live on $16,000 or less a year, as I have for many years quite happily. The only big possible problem with my plan will be if there is no fix to our health care system within the next 15 years, but I’m betting there will be, and if there isn’t I’ll move to Mexico.

BTW, I’m not saying I will never work for money again after hitting my target, just that I won’t have to. All my basic budget expenses will be met.

For those who are unhappy calculating the millions they believe they need to retire, consider the modest amounts that most people in the U.S. live on. As I admit, health care is the big big question mark, but there are lots of lifestyle options out there.

Right now I am saving over 50% of my income, which I don’t find onerous because I’ve been able to do this simply through avoiding lifestyle inflation rather than cutting out things I was used to.

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David Safar

J.D.,

Thank you for drawing attention to the difference between income and outgo! This is an important one, and one that I think tends to get glossed over by a lot of people, both average folks and the supposed “experts”. I think the default assumption is that most people will spend as much as they make, in which case the distinction is moot, but the truth is, a lot of financial advice works differently if your expenses are noticeably lower than your income. I’ll be writing a post soon about why I find it more beneficial to pay myself LAST, rather than first, when I’m in that situation.

Thank you!

-David Safar

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Beth

Gene, thanks for mentioning that book — I’ll be sure to look that up!

I do beg to differ about health care costs being completely covered! I currently see an alternative healthcare practitioner, and until integrative medicine takes off up here, those are significant costs I bear myself. (I see a regular doctor too, and I use the therapies that work for me). My company health plan, which I pay into, doesn’t completely cover costs for eye, dental, physio, etc.

Also, I’ve seen what my grandparents went through in the years and months before they passed away, so I’ve seen a lot of the costs that aren’t covered. Even if our healthcare system survives the next 50 years, I think we still have to plan for those unexpected costs — like home care, care giving, etc.

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Kevin

I’ve posted my method before, but here it is again. It’s based entirely off your expenses, not your income, like JD recommended.

Start with your current total monthly expenses.

Subtract expenses that you’ll no longer have upon retirement (mortgage, saving for retirement, life/disability insurance, saving for kids’ college funds, maybe only need one car instead of two, that sort of thing).

Add expenses you’ll have in retirement that you don’t currently have. This would be things like a travel fund (if you hope to travel once or twice a year), golf club membership, private health care, etc. Use current dollars, not inflation-adjusted (we’ll do that at the end).

Multiply this (monthly) amount by 12 to get an annual amount.

Figure out how much pre-tax income you’d have to earn to be left with this sum after taxes. That is, figure out the gross income that will leave you with enough to cover all the expenses you just calculated. Note that if you’re married (and expect you still will be upon retirement), you can split the total between you and your spouse and reduce your total tax burden.

Now, finally, adjust upwards for inflation depending on how long you have until retirement. I typically use a relatively pessimistic inflation value of 3.5%. Since I hope to retire in 22 years, I multiply my total by (1.035)^23. Note that doing it this way simplifies things, as it assumes the tax brackets will adjust upwards at the same rate as inflation.

Lastly, multiply the result by 25. This will produce the grand total you need to save in order to comfortably retire, assuming you withdraw 4% per year and increase it each year to match inflation.

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Paul in cAshburn

@Brian #33
I like the idea that in retirement you spend x% of your INCOME (interest from savings, income from pensions, social security, etc.) where x = total income minus the CPIx2. The CPI woefully understates actual inflation (to avoid paying true COLAs on social security) so you have to double inflation in your calculations. And, if you spend only what you take in, minus double inflation, then your future income will last forever! Yes I know that means you’ll have to save a lot, and yes I’ve heard that many people begin spending less around age 70 or so because they travel less (but spend more on healthcare?), so perhaps a formula like the Yale endowment formula would work best, which incorporates inflation and investment gains in an appropriate ratio. What does it all mean? It means you don’t retire until you’ve saved enough to have sufficient income – without ever drawing down principal – after double inflation. Will using this assumption cause you to save a LOT? Perhaps, but you can always retire earlier or spend more later if your intial savings assumptions are too harsh.

@The Weakonomist #5. If you don’t run the actual numbers to see how much to save while you’re young, you’ll never understand the approximation that a dollar saved in your 20s is worth 4 or 5 dollars saved in your 50s (due to compounding). Moral of the story is: Know what your actual number is, or be prepared for an “approximation” of retirement later. 🙂

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Elizabeth

@ Brian — thanks! I think I understand what you mean — So plan to withdraw an amount that will be replenished as you go along?

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Brian

@Elizabeth (#25):

While life spans may be increasing, I think the most conservative way to plan for retirement is to save up an amount that will never be depleted when you’re withdrawing 4% or less — if you maintain a relatively aggressive investment mix into retirement and can survive with somewhat less income in some years (And/or re-invest some of your excess in good years), this should be very doable, even with relatively conservative presumptions about future market returns.

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Gene

For us Canadians there’s an excellent book titled “Smoke and Mirrors” by David Trahair. It points out many of the fallacies in the “You need $X for retirement” wherein the $X is north of $1M.

At least in Canada he points out you can have a very comfortable retirement with $400k – $500k in the bank plus the pension plans provided by the Federal Government. He also provides spreadsheets to use to calculate how much you’ll actually need.

A friend of mine put me onto the book. He was in in his 50s and watching TV and worrying about his retirement. He picked up this book and realized he didn’t need as much as he’s been led to believe. He’s since semi-retired pulling in just enough money to not touch his nest egg, and he’s the happier for it.

Trahair points out a series of fallacies used by retirement investment advisors — of which he was one in the past. The primary point is that a slew of expenses simply disappear as you age. He points out:

– RRSP payments (retirement savings plans)
– RESP payments (education savings plans)
– Mortgage payments (you should have paid off the house by 65
– Vacation, etc. costs diminish if you have kids as you’ll foot bills only for you and the spouse for trips
– Clothing bills drop as you’ll probably not be buying as much as when you have a family or need a fresh wardrobe for work
– Utility bills will diminish somewhat simply by having fewer people in the house

He says savings can be had further by driving cars for longer periods of time, instead of trading in every 3 or 4 years (something this site espouses). And, if the house the family grew up in is too large, to downsize/rightsize.

Canadians have the further advantage that we don’t need money for healthcare costs.

I think that book nicely aligns with the thinking espoused on this site.

BTW, CPP (Canada Pension Plan) + OAS (Old Age Security) provides about $15k/person annually so an elderly couple will pull in about $30k.

Obviously, if you’re sans kids the formula changes, but as my childless friends point out their expenses are lower to start with so they can save more for longer.

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Steve

The more you save, the less you are spending. The less you are spending, the smaller nest egg you need to retire. So saving more both increases the size of your nest egg faster and decreases the size it needs to get to – a double whammy!

As a very (very) rough rule of thumb, shifting one percent of your net income from spending to saving could let you retire almost a year earlier.

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Jordan

I agree with using expenses to calculate retirement needs, especially in this current economy.

My husband and I are in our late 30s, a couple of years ago we worked with a financial advisor to come up with a plan for our financial future and retirement – using then current due income as basis of course. A year later I was laid-off so all calculations went out the window.

Fortunately I am a firm believer in saving portions of my income, I started with $200 and later on $1000 a month, I just stash them in a local bank that pays high interest and not look back. We also are debt free, we have no outstanding balance on our credit cards and all cars are paid off. The only big ticket item is our mortgage. To make a long story short, I was able to use my savings to get through the laid-off even with a newborn baby (I was 8 months pregnant when I was laid-off, which contributed to my situation for not pursuing another employment).

I have been off from work for a year and my annual spending while staying at home with the baby is approximately $12,000 (this includes grocery for the household, baby expenses, and personal expenses). My husband’s income covers all the expenses related to the household (mortgage, utility, gas) but no extra left for savings. We have a little over $100K remaining.

I’m about to go back to the workforce because our 401(K)s are more like “201”. Relying solely on my husband’s income have no rooms for savings, which we need. We also have to save for our baby’s college.

A few points I’d like to make:

1) Year-End Summary from your credit card – The year-end summary is very helpful to me to make me understand my spending patterns over the year; that’s how I get the $12,000 figure for my annual expense while out of work. I charge everything – of course it also comes with a self-imposed habit of paying it off monthly. I never carry balances – I either pay them off or forget to pay that month (which is very bad!)

2) Please don’t underestimate the power of stashing a portion of your paycheck everytime when you get paid. I always set up 2 accounts for direct deposit – I set aside an amount (like $200 per paycheck) to automatically go to my savings account; the rest goes to the checking account for spending. I never look at the savings account so mentally, they are “out of sight, out of mind”. I don’t touch this account unless is emergency, like my laid-off. I was pleased to see the balance when I needed them. I use http://www.Presidential.com and INGDirect.com by the way.

3) We also set up a 3rd savings account to buy things that we like, but not necessary. We set up a goal to put in $200 a month into this account. Once I get back to work I will be able to contribute more, we’ll probably get the TV he wants by Christmas 2009.

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The Math Guy

I think the question of how much you need for retirement is linked to how well your retirement investments perform over the long term. I’m particularly interested in this since (as luck has it) I JUST finished uploading my new e-book onto Lulu titled “Investing for the Long Term,” and it focuses on getting you the best return for retirement with low yearly contributions.

In more detail, the book is about how to outperform all these money managers, financial advisers, and other “professionals” by using simple math (moving averages and other simple concepts) and in it I discuss the rolling 20 year returns of the market since 1872 and show how applying a simple moving average improves not only return but risk over buy and hold. The first few pages of Chapter 1 are free and I’m hoping to get some feedback on it. Great post.

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Paul in cAshburn

Thank you to all who have provided calculator sites, I intend to make the search for the best software my quest over the next few years. Any other pointers to calculators – even those you have to buy or subscribe to – will be appreciated. Now if only I could find a NAPFA advisor who has also been trained by Ed Slott…

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ldk

Great post and comments! Would love to hear others thoughts on whether the value of your primary residence should be considered when making this projection? Does assuming a 4% withdrawal rate from your portfolio in retirement also assume you ‘cash out’ your home equity at some point and invest it? Our home currently represents about 1/3 of our net worth.

Thanks!!

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Chris

@ #19 ANN:

You are 30 and own 400k in real estate and have 100K in cash? Would you mind expounding on that a bit?

My goals are in line with yours and we are the same age and I’m nowhere near those numbers. I’d love to get a fresh perspective.

Cheers,

Chris

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Glenn

Since I’m relatively young (24), I haven’t started thinking about a specific retirement number. Instead I’m socking away whatever I can until I can knock out the last $1500 on my credit card (looking at June or July for that, since my 0% interest deal ends in August); once that’s done I’ll start looking at starting an IRA and, if the gods love me and my company hires me on full-time, a 401k.

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ab

Appreciate your thoughts on using future spending as a better measure than current income. While I agree this makes sense in theory, I think the reason most calculators use income is because it’s a much more objective number. Most people (unfortunately) don’t have a good understanding of how much they spend each year. More importantly, most people drastically underestimate this amount (it’s easy to plan to save money in future and the nobody ever factors in the inevitable emergencies that come up). So I wouldn’t be too hard on the conventional wisdom, at least as a starting point for the general population.

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Elizabeth

What worries me is that people are planning their retirement based on today’s lifespan. For example, if you are 30 years old right now, chances are you’re not planning on living past 100.

But at the rate medical science is going, what do you think is going to happen in the next thirty years before you retire? If you read any of the research from experts like Michael Rose or Aubrey de Grey, you’ll see that there are technologies coming in the next couple of decades that will greatly extend not only our lifespans but the years of good health we’ll enjoy. (Of course, taking advantage of these technologies will require costs too).

So if you’re planning to retire at sixty, do you plan for thirty years of retirement? Fifty? Sixty? If you have more years of health, can you consider retiring at 80 instead? (if 80 become the new sixty?)

I don’t know where all of this research is headed, but it’s quite provocative. Our idea of “old” is changing, but I’m worried that retirement planning is still based on models that will be out of date before long.

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The Personal Finance Playbook

FIRECalc looks like an excellent tool. I think using any CAGR calculator can be a helpful planning tool, even though it’s much simpler and more basic than many of the tools mentioned. I would suggest being very conservative when entering the interest rate you expect to get on your money over the long haul. I would go with around 5%. Plan conservatively so your money will last. Best of luck to anyone close to retirement.

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Justin Philips

The idea of multiplying by 25 seems great. I should sit and work the numbers.

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Jason

If you are making $50,000 a year and spending $75,000 a year you’ve likely got some bigger immediate issues to take care of before even thinking about retirement planning.

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simplesimon

Remember that when you’re looking at your spending dollars that these are after-tax dollars. When you figure out your annual spending, you’ll need to figure out what your pre-tax dollars will be if you’re withdrawing from traditional IRAs.

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Baker @ ManVsDebt

Before this post I had never heard of FIRECalc, but I am starting to see what you like about it. I’ve only had a chance to mess around with it a little, however it seems like a well-rounded tool.

I’m glad you able to shed some light on using expenses as a basis for retirement. A lot of financially successful people I know have spent year living on a fraction of their income and are perfectly fine retiring earlier and simply maintaining their current lifestyle. Of course if they used income in the projections they would have many, many more years of saving to go!

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Ann

Goal: $750k in real estate and $1 MM in cash*. Even if I live to 90, I should be okay.

So far: $400k in real estate and $100k in cash. (Cash will increase dramatically when the primary residence is paid off on Dec 15, 2009.)

Years to go: 25 (Freedom 55, baby! It was Freedom 45 until I realized I will be supplementing my parents’ retirement. Now I just have to convince them to let me help…)

ETA: I don’t use government or company pensions when I calculate my retirement because those are iffy.

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brad

Frugal Bachelor’s point is on the money. For most people, it’s a mistake to assume that you’re going to maintain your current spending habits and lifestyle when you retire. It’s a lot more useful to spend some time thinking about what you want to do when you retire, and then figure out how much money you need (factoring in inflation) to sustain that lifestyle. Retirement is all about changing the way you live now. It’s not about living the same life you live now without working. What are you going to do for the 8 or more hours a day that you spend working now? If you can develop a vision of what you want your life to be like when you retire, that will help you figure out how much money you need.

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Marie

What infuriates me is that with everyone harping on you to start saving early, you’d think the calculators would start younger. So many of the ones I’ve tried don’t even let you use them younger than 35 or 30.

These funds are managed just like a pension fund, they’re not your typical retirement income fund. Your payout can change dramatically from year to year.

They help me decide how much portfolio income I would have if I put all my after-tax savings into one of these funds.

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Kent @ The Financial Philosopher

I like your unconventional approach. Let’s get even more unconventional: Create your own definition of retirement before quantifying it with monetary measures!

If one’s definition of retirement is simple and based upon contentment, then the anxiety and processes to reach a seemingly unobtainable financial goal may be obtained… NOW!

Why would someone want to base retirement solely on monetary measures? Is money really what provides our “freedom?” Well-being and true freedom can not be quantified or obtained by monetary means.

What’s more, it does not always require money to do what you want to do.

Define terms, such as retirement, or they will define you…

“Man acts as though he were the shaper and master of language, while in fact language remains the master of man.” ~ Martin Heidegger

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Beyond Paycheck to Paycheck

An additional benefit of spending less than you make when contemplating your retirement needs is that any money you’re saving while you work immediately comes off of your cash-flow needs during retirement. After all, there’s no reason to save for retirement when you’ve already reached retirement!

As you’re probably aware, there’s a whole book, “The Number” by Lee Eisenberg, devoted to this very topic. A good read.

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Anthony F

As a fee-only financial planner I do these calculations frequently. Over the years I’ve tried to simplify the process so people can understand it. Typically I use 100% of what people make now as a starting point. Although determining a spending amount is preferable most people do not have a handle on how much they WILL spend in the future. You simply need to save approximately 25 times your required income (this equates to a 4% withdrawal rate in retirement, which is a safe withdrawal rate through most economic cycles and patterns of returns). You must also adjust for any fixed retirement benefits (ie. pension, social security). For example:

The last step is to structure a diversified low-cost portfolio based on your own ability, need and willingness to take risk. I do this for clients and also run a monte-carlo simulation that will give the investor an idea of how successful they might be given their goals and the portfolio I design.

Great site, keep up the good work.

Regards, Anthony

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Adam @ Checkbook Diaries

When I think about how much I will need for retirement, I base it on how much money I currently spend, and think I will spend in the future. I’m just about to hit 30, so I’m sure my number will change, but right now I figure I’ll be able to live on roughly $40k a year (holding no debt) and would like to “retire” by 55. If I plan to live to 85, my total number needed would be $1.2 million. That doesn’t take into account inflation or interest earned on investments, but it also doesn’t take into account that I plan on setting up some minimal effort streams of revenue. Another consideration is that the house we are in right now is perfect for growing old in since everything that we need (including the master bedroom and bathroom) is on the first floor.

If you’ve seen my blog, you’ll notice that my goal is to build a net worth of $4 million by age 55, but if need be I think I can retire at 55 with $1.2 million. These numbers may seem grossly out of whack, but they’re something to shoot for.

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sandy

Stash as much as you can away when you are young and single and healthy. life does come fast, and you will be forever grateful that you have that cushion in your life, no matter if you use it for retirement, healthcare, or fertility treatments. You never really know how you’ll need cash, but at some point, most of us do.

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Ray

Many don’t know what their retirement will look like (or want it to look like)till they are about 40 years old and by than if you havent saved chances are you will not reach your “dream retirement”
As couple others said I just save up as much as I can right now and in about 20 years I will have to start looking at the details of my retirement. Right now I have no idea what I will do or if I even want to retire.

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EscapeVelocity

I don’t have a number. I did go to a financial planner once for a look-over and they said things looked fine.
What I’d really like to do is to take some time off to travel BEFORE I get old and have to worry about falling down and pay someone to carry my bags for me and all that. I did one round in grad school, so if worst comes to worst I have that, but I’d like to do some more. I don’t think I’d really mind working when I’m actually old, just for the social contact, although preferably only part-time.

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ABCs of Investing

I look strictly at future expenses when determining how much I need. Basically I look at my current expenses – subtract some obvious temporary costs such as mortgage, kid costs etc and then add in some travel costs.

The actual process is fairly involved but my suggestion is that unless you are pretty close to retirement – don’t sweat the details. If you are 30 years old then your assumed rate of inflation will have a far greater impact on your retirement predictions than a small error on your Social Security payment prediction.

Alternatively – if you are fairly young and have obvious financial situations to take care of (ie start saving, pay off debt) then do what Weakonomist does and just work on those.

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Mr. GoTo

I am a baby boomer not yet retired but in the home stretch. I agree that using current income as a baseline metric for estimating retirement income needs is a mistake. In addition to the calculators you listed, I recommend that readers take a look at “Financial Fate” (currently a free download) and “Financial Engines” (requires a subscription but well worth it.) These take more time and effort to use but provide a superior output for real world retirement scenarios.

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Michele

I’ve used the calculator at choosetosave.org It is a program of the Employee Benefit Research Institute. It gives you a “ballpark” figure of what you need in retirement by taking into consideration what you’ve saved, what plans you have (pension/no pension), whether you plan to work in retirement, etc. Here is the link:

For me, it said I need to save $10,000 annually based on what I have already saved, which seems a bit low to me, even though I have saved a lot. It does take into account Social Security Benefits, which you can input “$0” if you prefer. I did a post on this recently, too:

I try not to worry about getting to a certain magical number. Instead I’m interested in just stashing away as much as possible. When I reach an amount that makes me feel comfortable I’ll retire.

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Frugal Bachelor

How much you spend depends on what you plan to do. I plan to spend a few decades riding around the planet on a motorcycle. This has a different cost structure than for example, staying inside your subdivision and eating boiled hot dogs. The FIRECalc seems useful because you put your spending amount and horizon.

P.S. FIRECalc says I have a 34.9% chance of success retiring today.

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Jim Z

The most likely reason that most calculators base their assumptions on income and not spending is because they want to further propagate the ideal that it is normal and acceptable for most people’s spending to equal their income. It’s a disservice IMO. Thanks for the article and links.

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Carmen

USAA has an EXCELLENT retirement planner, but I think you have to be a member to use it. It asks you what kind of lifestyle you want as a retiree as a starting point and breaks it into categories (with questions such as I want to travel several times a year and such)… The other assumption that really changes the equation is how long you expect to live!

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Writer’s Coin

My goal is to just try to save as much as I can now that I’m young in as many different ways as possible (401k, Roth, etc.).

Once I get older (maybe in my mid 30s or 40s) I’ll start to really break down the math. The way I see, too much can change between now and my retirement for me to make assumptions.

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